- total return swap
total return swap (TRS)A total return swap or total rate of return swap is a bilateral contract where one party receives the total return on a reference asset in exchange for paying the other party a periodic cash flow, typically a floating rate such as a LIBOR-based rate. The reference asset may be a single asset or a basket of assets or an index. A total rate swap is similar to a plain vanilla swap except that a total return (that is, the cash flows from the reference asset, such as interest, as well as any capital gains and losses) is exchanged, not just the cash flows.A key feature of a total rate swap is that the parties do not transfer actual ownership of the reference asset, as occurs in a repo. This allows greater flexibility and reduced up-front capital to execute a trade. This also means a party to a total return swaps can be more highly leveraged, making total return swaps a favourite of hedge funds.Related links+ total return swap (TRS)USAA type of derivative that replicates the cash flows of an investment in an asset (usually a security, basket of securities, index or other financial instrument). A TRS requires the parties to make payments to each other based on the performance of the underlying asset. Under a TRS, one party, Party A, receives payment from the other, Party B, based on the appreciation in value of the asset(s) over a certain specified period (often monthly) or makes payments to Party B based on a decline in value of the asset during the specified period. This type of arrangement is often referred to as a synthetic investment. A TRS permits Party A to simulate investment in the underlying asset(s) without incurring the burden of ownership of the asset(s), including any adverse balance-sheet implications. The TRS simultaneously permits Party B to protect itself against a decline in value of the underlying asset(s).Related terms
Practical Law Dictionary. Glossary of UK, US and international legal terms. www.practicallaw.com. 2010.